SDN: New Tech to Move Data Faster

Investors, including some of the world's biggest technology companies, are buying into the start-ups behind SDN, a technology that allows users to substitute some of the most complex hardware functions in server switches with software.

As Superstorm Sandy bore down on the US East coast last year, companies with data centres in its path needed another location fast. But moving computer servers is tricky, and usually planned over days or weeks. Enter a new technology: software-defined networking, or SDN. Such urgent data moves could now be done within a few hours.

Investors, including some of the world's biggest technology companies, are buying into the start-ups behind SDN, a technology that allows users to substitute some of the most complex hardware functions in server switches with software.

SDN is still relatively small, generating around $300 million in annual business in a $30 billion networking industry. Customers are not yet sure how to make the most of its flexibility.

But established operators such as IBM, Cisco Systems and Microsoft are starting to pursue a technology that market research firm IDC says could generate annual revenue of $3.7 billion within just three years.

Cloud software maker VMware made its move last July, snapping up Nicira for $1.05 billion. Cisco, Oracle and Juniper Networks have also bought SDN companies in the last year.

Private-equity firms have backed companies such as Embrane and Plexxi, while Intel and Goldman Sachs have invested in Big Switch Networks. SDN allows the control functions of data centre switches to be run separately from the servers they manage, allowing much more flexibility in the control of computer networks.

"For 30 years we've sold the physical box and the software, and the vendors don't allow you to buy one without the other," said John Vrionis, partner at venture capital firm Lightspeed Venture Partners, which is backing Embrane and Plexxi and is a former investor in Nicira.

With SDN only coming of age in the last two to three years, standards vary between vendors, holding back large customers who don't want to be tied to one supplier. But the entry of the big players has brought a determined drive for a common standard.

Cisco is most tied to hardware networking equipment, putting its business most at risk from SDN, but analysts say it is keen to dominate this technology too.

"There will be other vendors, but I think Cisco will be the main beneficiary for the next couple of years," said Justin White, an investment analyst at T Rowe Price. The firm is Cisco's sixth-largest shareholder. "For enterprises, the most logical approach is probably to stick with someone like Cisco."